Dealing with commercial leases in the time of COVID-19

In these turbulent and unpredictable times, the impacts and challenges that COVID-19 bring to daily life continue to evolve on a daily, and even hourly, basis. COVID-19 will continue to cause significant disruption and challenges to all persons, business and governments on a global scale.

Given the uncertainty of the current situation, it is increasingly likely that the Federal Government could exercise its State of Emergency powers at some point in the coming days or weeks to force closures of shopping centres and other retail areas.

This will have widespread implications for retail landlords and tenants in circumstances where they are already operating in a tenuous market climate. We set out below some key legal tips which landlords and tenants should consider in these uncertain times:

1. Stay on top of communication from authorities

This is something that everyone is likely already doing, but it is vital that landlords and tenants are alert and responsive to any new requirements issued by authorities, and consider what this means for their business.

The Victorian and New South Wales Small Business Commissioners have both published alerts and publications to assist small businesses in dealing with the impact of COVID-19. Tips and resources are available to businesses on a range of topics, including:

When in doubt, you should seek advice about your specific circumstances.

2. Review your lease documentation

The lease between the parties is the starting point to determine the legal obligations and rights of the landlord and tenant.

Generally speaking, unless the lease provides otherwise, there is no obligation on the landlord to provide any concessions, such as rent rebates, in unforeseen circumstances such as a global pandemic. Tenants must ensure that they remain compliant with their obligations under the lease, including paying rent or the need to report to the landlord if any COVID-19 cases may be linked to the lease premises.

Parties will need to carefully consider the implications under the lease and their specific obligations, such as the need for cleaning, compliance with government authorities, etc.

Most leases will include clauses which require the tenant to:

comply with the requirements of an authority; and

comply with all laws, requirements, notices or orders made by an authority;

Leases may contain a force majeure clause, which is a clause that precludes a party’s liability where the failure or omission to perform a certain act is outside of the party’s control. A public health crisis such as the COVID-19 pandemic may fall under this category of events, depending on the way in which a force majeure clause is phrased.

In the event of forced closure for public health reasons, both the landlord and tenant would be required to comply with authorities, and the landlord may require the tenant to close the premises, leading to a loss of business. If this occurs, tenants would normally have limited recourse to bring a claim against a landlord, as tenants would need to substantiate a claim of damages against the landlord. This would be difficult where the damage is caused by the landlord being required to comply with an authority’s direction. Some damage and destruction clauses in leases cover situations where premises are made inaccessible, and may give a tenant a right to rent abatement or lease termination.

It may be possible for a tenant to make a claim against a landlord on the basis that the landlord has an obligation to provide quiet enjoyment and the lease itself has been “frustrated”.

In the case of Li Ching Wing v. Xuan Yi Xiong [2004] 1 HKLRD 754, a Hong Kong court rejected a tenant’s claim that a lease was frustrated due to the premises being affected by an isolation order issued by an authority during the SARS outbreak in 2003. The order meant that the premises could not be inhabited for 10 days.The court held in that case that the 10 day period in the context of a two year lease was not enough to “significantly change the nature of the outstanding contractual rights or obligations” of the parties in the case.

Although there has been no comparable case in the Australian jurisdiction, we envisage that such a short-term interim order may have a similar result here, if that was to apply. Obviously the longer that the tenant is prevented from accessing or using the premises, and the larger the impact on the tenant’s business, the greater the chance that the tenant may have to claim that the lease is frustrated.

3. Communicate between landlords and tenants

Landlords and tenants should ensure that they are appropriately communicating with each other as circumstances change. Given the current unfavourable market climate, landlords should be aware that tenants may be suffering from cashflow and payment issues, such as rent and outgoings. It may be prudent to assist the tenant to remain at the premises rather than end the tenancy and risk having vacant premises. Landlords should also be assessing what tenant securities are being held, and the terms of their loss of rent insurance policies.

Tenants in this situation should ensure that they are proactively communicating with landlords if they anticipate these issues occurring, rather than waiting until they fall behind in their payments and breach their leases. Landlords may be willing to negotiate with tenants on matters such as payment plans, rental reductions or grace periods for outstanding periods, in the right circumstances. Tenants should also consider the terms of any business interruption insurance held, including whether it would extend to pandemics.

4. Protecting employees

Employers are facing hard choices as to how to protect their workforce, clients and business. In the midst of an increasingly uncertain retail climate, landlords or tenants who are also employers are obliged to ensure that their workplace is safe for employees, whilst also considering their legal obligations under the Fair Work Act 2009, as well as any enterprise agreements or awards. While a forced closure may allow employers to stand employees down without pay, that option is only available in very limited circumstances.

For more information as to how to manage employees, please see the following update from Russell Kennedy’s Workplace Relations, Employment and Safety team here.

For information specific to aged care providers, please see our alert from Russell Kennedy’s team here.

5. Protecting tenants, visitors, and other users of your space

People with ownership or management of a commercial property also have obligations to ensure that the property is safe for people.That may extend to additional cleaning and sanitising measures, making hand sanitiser available, and making information available to visitors about the safety measures in place, social distancing, and the importance of hygiene.

How we can help

It is important for landlords and tenants to understand the implications for their leases in the context of the COVID-19 pandemic. Russell Kennedy’s leasing team has the experience and expertise to guide parties through these trying times.